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Changes regarding the “prescriptiveness” of payment services regulation are on the cards, the UK government has suggested in a new call for evidence.
The UK government has published a new consultation on payment services regulation, seeking the views of the industry, as it continues to diverge its alignment with the EU on key payment policies.
“The Payment Services Regulations and wider retained EU payments law have had some success in promoting the government’s objectives for payments,” the document says. “However, this review has also identified certain deficiencies where the framework could be improved to better meet the revised objectives for payments regulation.”
Stakeholders have until April 7 to respond to the consultation.
Published on a Friday afternoon, some payments players wryly noted to VIXIO that it made their weekends much busier than anticipated.
Nevertheless, there is also a recognition that the government appears keen to engage the payments sector on how it should be regulated.
"The Payment Services Regulations are the central piece of legislation for the UK payments sector, and generally have more of an impact on payment service providers than other areas of regulation,” said Max Savoie, a partner at Sidley Austin.
According to Savoie, the review is pretty broad in terms of what the government wants to look at. “It certainly gives a strong indication of where they want to focus."
"The government is showing a genuine willingness to engage with stakeholders, so hopefully this consultation provides the opportunity for an open discussion with the industry,” he said.
Tony Craddock, director general of the Payments Association, commented: “At long last.”
“We have the long-awaited soup-to-nuts review of the biggest single determinant of our industry’s future,” he said.
For Craddock, growth in payments depends on three things: regulation, regulation and regulation. “And until now, regulation of payments services has had to be aligned with the EU’s regulations, which has generally served us well.
“But there are areas where it could be improved and others where regulation can be either added or removed. Now is the time.”
Jack Wilson, head of public policy at TrueLayer, told VIXIO that the review of the Payment Services Regulations signals the UK's intent to keep pace with the EU (which kicked off its review of PSD2 in May last year).
“The original UK Regulations underpinned open banking, giving consumers and businesses the legal right to use third-party providers,” he pointed out.
“Although the Treasury's Call for Input rightly hails open banking as a success, this review is a big opportunity to tighten up areas of the regulations which are holding open banking back.”
For Wilson, these relate to scope, user experience and access issues. “It's therefore a little surprising that the Treasury's document concludes that the government is progressing the further development of open banking outside the scope of this review,” he said.
“Open banking services are payment services after all. It will be interesting to see how the review unfolds.”
Craddock also expressed concern about the lack of open banking in the review, and said that the exclusion of stablecoin regulation is “worrying”.
“Is this pragmatic? Or does excluding these two major areas of innovation and change diminish the potential for this otherwise welcome review of payments services regulation to be a harbinger of a new wave of investment, innovation and employment in the UK payments industry?,” he pondered.
The question now is how extensive a drift from the EU the review will look to take UK payments. Although the government has often spoken up on the benefits of divergence, its actions have so far not been particularly radical.
For example, while ministers have talked up the possibility of diverging from the General Data Protection Regulation, experts have previously told VIXIO that is unlikely to be a break with the EU, owing to the risks of no equivalence.
"The big thematic question is the extent of divergence from the EU,” according to Savoie. “The received wisdom in the sector is that the UK can't really afford to diverge that much, given the need for UK firms to be able to continue to access the SEPA schemes and infrastructure.”
Although the Treasury appears to appreciate this, the review hints that it is willing to test the waters on divergence in certain areas of payments regulation, he continued. “The elephant in the room is PSD3, which I am sure the Treasury and the FCA will be monitoring closely."
Insolvency/Safeguarding
Speaking of that elephant in the room, regulators on the other side of the English channel have talked up regulating the payments sector in a similar way to banking, especially regarding issues such as safeguarding and insolvency.
This has drawn mixed views from the market to date, but the UK government also appears interested in change here.
“The review indicates the government is minded to delegate rules on safeguarding to the FCA,” said Savoie.
This would mean that the UK’s financial watchdog could be set to create a more detailed set of standards, akin to those that apply to other financial services firms under its client asset rules, which Savoie believes could lead to significant changes for payment and electronic money institutions.
“While cases of insolvency are not frequent, where they have occurred, they have had detrimental impacts on consumers, with long delays to return of funds and consumers losing significant sums,” the discussion paper says.
In part, this has been due to the high-level nature of the existing requirements in the Payment Services Regulations and Electronic Money Regulations, the government adds, pointing out that this has led insolvency practitioners to seek court directions in the course of the administration or liquidation process.
Consequently, this has led to “lengthy and costly proceedings”, which the government believes has been to the “detriment of consumers” and has eroded some underlying funds.
Work has already taken place to improve this. In 2021, the government legislated to establish the Payment and E-Money Institution Special Administration Regime, with the intention of accelerating the distribution of funds to customers by providing insolvency practitioners with an expanded toolkit.
Yet, this has not necessarily been successful so far, with the government conceding that recent court judgments have highlighted ambiguity in the safeguarding regime.
Now, the government is looking to introduce clearer rules. “The provision of such clarity would provide for the more efficient insolvency of relevant firms and ensure safeguarding requirements keep pace with the ongoing evolution of the payments and e-money sector.”
More flexible SCA
Among changes outlined, the government has suggested that it could make amendments to strong customer authentication (SCA) requirements.
"SCA has been such a big topic and the theme that has emerged recently is the FCA looking for ways to provide more flexibility for firms, particularly in the context of open banking,” said Savoie.
“This could be the start of a more wholesale review of standards set at EU level."
Although the government regards SCA as an important security measure, and suggests that fraud prevention has improved due to its implementation, the report acknowledges that “concerns have been raised about the prescriptiveness of the Strong Customer Authentication requirements under the legislation”.
Concerns have been raised regarding whether some market practice in implementing the standards has had a negative impact on access to payment services by certain customer groups, particularly those who may not have access to a mobile phone or reliable mobile phone coverage, according to the consultation.
In addition, the government notes that some critics have suggested that SCA requirements, in particular 90-day reauthentication, has led to excessive friction in relation to open banking.
This has been remedied already by the FCA, which redrafted its exemptions to remove the 90-day rule.
The government “believes it right to consider whether a more outcome-based approach to authenticating payments might enable firms to continue to have the flexibility to innovate to meet evolving threats, and to meet the complex and diverse needs of customers and what this might entail”.
Beyond SCA, the government also looks set to make changes to the requirement that payment service providers ensure payments are credited to accounts by the end of the next working day, which is known as D+1.
Although the government has spoken up about the benefits of speed and clarity, it appears open to creating exemptions here.
“Some firms have suggested there may be benefits to enabling further time for a payment delay specifically, in order to engage the customer, than is currently permitted under the legislation,” the report suggests.
The government is also considering whether there may be benefits to enabling receiving banks, if they suspect that they may be hosting a fraudster’s account, to delay the crediting of funds to a payee’s account, before they properly engage the relevant provisions in the Proceeds of Crime Act.
‘Cancel culture’
Under the "Effective contractual protections for payment service users" section, the government makes reference to PayPal and the news coverage of it terminating and later reinstating accounts.
Although PayPal has not publicly disclosed the cause of the termination of service, the concern raised in this particular case related to a perception that the termination of services was due to the publicly held views of PayPal’s users and those associated with them and the extent to which this raised principled risks around the protection of freedom of expression.
For example, high-profile accounts that have previously been terminated include a pro-democracy group in Hong Kong and the UK’s Free Speech Union, which has been outspoken in the UK on issues such as COVID-19 related lockdowns.
“The government believes that free speech within the law, and the legitimate expression of differing views, is an important British liberty,” the document says, firmly stating that the government is in opposition to so-called "cancel culture".
“The government is very clear that regulations must respect the balance of rights between users’ and service providers’ obligations, including in relation to protecting the freedom of expression of anyone expressing lawful views.”
Here, it is the government’s view that, without deviation, a notice period and fair and open communication with a customer must apply in situations which relate to termination on grounds other than suspected or actual criminal offences or when otherwise allowed by law.
However, the government does concede that it is lacking evidence of the extent to which providers cease to provide services based on the views expressed by their customer base, or more generally, evidence of the circumstances and speed in which they terminate customer relationships.
“The government would like to hear more through this review from both providers and users of their experiences and reflections, to assess if the current framework is operating in the way explained in this document or requires further clarification or wider change to protect matters such as freedom of expression.”
